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Unfortunately for some shareholders, the Glen Burnie Bancorp (NASDAQ:GLBZ) share price has dived 32% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 29% over that longer period.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does Glen Burnie Bancorp's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 13.25 that there is some investor optimism about Glen Burnie Bancorp. The image below shows that Glen Burnie Bancorp has a higher P/E than the average (8.8) P/E for companies in the banks industry.
Its relatively high P/E ratio indicates that Glen Burnie Bancorp shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Glen Burnie Bancorp had pretty flat EPS growth in the last year. But it has grown its earnings per share by 13% per year over the last three years. And it has shrunk its earnings per share by 4.0% per year over the last five years. So you wouldn't expect a very high P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does Glen Burnie Bancorp's Balance Sheet Tell Us?
Glen Burnie Bancorp has net debt worth 51% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Glen Burnie Bancorp's P/E Ratio
Glen Burnie Bancorp has a P/E of 13.3. That's around the same as the average in the US market, which is 13.0. While it does have considerable debt, the market seems to be reassured by recent growth in earnings per share. What can be absolutely certain is that the market has become significantly less optimistic about Glen Burnie Bancorp over the last month, with the P/E ratio falling from 19.4 back then to 13.3 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Glen Burnie Bancorp may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.